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Brazil’s Mine Disaster Reveals Its Shaky Foundation

(Bloomberg Opinion) -- In the aftermath of Brazil’s deadliest mine disaster, a nasty and familiar feud has broken out.

Green groups and community activists blamed avaricious industrialists, free-market fundamentalists and their official enablers for gutting safety protocols that led to last week’s collapse of a tailings dam at Vale SA’s Feijao iron ore mine, in Minas Gerais state, which has claimed at least 110 lives, with more than 230 people still missing.

Their outcry clashed with the mantra among businesses and some policymakers that a top-heavy state and its thicket of environmental strictures are strangling enterprise and spooking investors.

It might be just one more of the partisan shouting matches that has poisoned the Brazilian conversation lately. But what if both camps are right? President Jair Bolsonaro took office on a promise to raze the old Brazil by eliminating bureaucracy and the kudzu of regulations that hold back enterprise and individual liberty. Move over human rights, classroom multiculturalism and nature preserves: Guns for all, home schooling, silos and sluice ways were the new agenda. His appeal struck a nerve in a country where rules beget more rules. But it glosses over the shadow land where businesses game that system by going cheap, officials leverage red tape for rent-seeking and politicians are willing to mortgage public interest for pork and patronage.

The mining catastrophe reflected each one of these smaller disgraces and, thankfully perhaps, has shaken a number of Bolsonaro’s tidy pieties.

Notwithstanding the partisan slurry, Brazil clearly suffers both from environmental negligence and corner-cutting capitalism as well as from bureaucratic overkill. Despite centuries of mining prowess, Brazil scored below five other Latin America nations in mining regulatory standards, according to Fitch Solutions’ Mining Risk/Reward Index.

Brazil is hardly the only offender. Although the number of tailings dam failures has been declining globally, serious dam breaks are on the rise worldwide. Even before the deadly Feijao breach, Brazil was already home to two of the eight worst tailings dam collapses since 2014 — a record the country’s paper-pushers have failed to address.

Planners, wonks and legislators spent 33 years arguing over the dam security bill, which finally was written into law in 2010. Yet directors for the new mining regulatory body were appointed only in December and the agency opened with a backlog of some 20,000 mining concessions still in limbo largely due to red tape.

It can take years, a pile of paperwork and countless stamps and signatures to get a factory, big farm or mine approved and running. Just to acquire an environmental license entails clearing three separate bureaucratic hurdles. “Environmental licensing should be rigorous but also fair,” Flavio Miguez de Mello, vice president of Brazil’s National Academy of Engineering, told me.

Miguez should know: He’s one of Brazil’s leading experts in dam safety and also a junior partner in a small hydroelectric generator in the hills outside Rio de Janeiro. “It took a decade to obtain environmental licenses for a three-meter dam,” Miguez said. “Some investors are abandoning plans to build hydropower for thermal plants, which pollute more but take months instead of years to obtain permits.”

Those travails pale before the human catastrophe still playing out in mining country. Yet the bureaucratic sinkhole is one reason why governments on the left and right generally have agreed on the urgency of rationalizing the licensing process. That may be because the migraine-inducing red tape that only a lawyer could love apparently is no guarantee of human safety or of conservation. Brazil has logged 10 serious tailings dam breaches just since 2000.

Neither has regulatory rigor led to swift adjudication of reparations or punishment once disaster has struck: No mining executive, regulator or engineering firm was jailed in the 2015 dam failure that killed 19 people and buried an entire town. Thanks to nimble negotiators, the mine operator Samarco, a joint venture of Vale and Australian-owned BHP Group, has yet to pay a centavo of the near $100 million fine levied for that catastrophe. More than three years on, many survivors and relatives of victims still await damage claims and live in temporary housing.

Perhaps the markets can kick in where the courts failed. Vale’s shares capsized on the Brazilian bourse and on the New York Stock Exchange early this week, before recovering slightly. The company is also at risk of forfeiting its investment-grade rating after Fitch Ratings, Standard & Poor’s and Moody’s Investors Service downgraded its credit to just above junk. Throw in the prospects of yet another shareholders’ class action and the writing on the boardroom wall seems clear: “This disaster demands we rethink the way mining is managed,” said economist Carlos Alberto Teixeira, a former industry, commerce and mining secretary of Minas Gerais, Brazil’s most traditional mining region. “Company investors and stakeholders will have to take this on.”

They might want to focus not just on how few dams are ever inspected — just over 3 percent in 2017 — but also how staff-starved, fiscally challenged local governments can’t possibly make that right. Tellingly, Minas Gerais, home to Brazil’s worst dam failures, declared “financial calamity” in 2016.

Part of the solution may be ramping up self-inspection, by which miners take responsibility for monitoring and maintaining their own dams or face penalties. The new mining code has a provision for self-inspection, and mining majors are falling in line.

Farming out inspection is no silver bullet. Even the highly regarded German certification firm TUV Sued AG failed to catch the danger at Vale’s Feijao dam during an inspection last year. Penny-pinching mine operators often are loath to spend on environmental safeguards and emergency warning and evacuation plans.

Big Mining generally does answer to higher standards. Still, Vale’s announcement this week that it was deactivating its cheaper, outdated upstream storage dams, like the ones that burst at Feijao and in Mariana, was an admission that corporate brands also balk at modernizing.

But relying on threadbare regulators and pliant politicians isn’t working. “There is no way that government authorities can inspect and monitor the thousands of dams spread around the country,” said Miguez.

The disaster was also a cautionary tale about how government overreach and flawed corporate governance can contaminate policy, shackle development and even turn deadly. “Yes, powerful interests interfere in public policy. It’s been that way throughout our history and it’s part of our political culture,” said Teixeira. “We need to find a way to conciliate the two and close the door on spurious lobbies without criminalizing lobbying.”

By now it’s brutally clear that to rescue their mining industry and safeguard population at risk, Brazilians need to work out how to banish dangerous shortcuts and bargain-rated obsolescence — all Brazilians. Red tape alone won’t hold together bad dams, anymore than slashing rules without a plan guarantees good government.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”